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25 June, 18:26

Nesmith Corporation's outstanding bonds have a $1,000 par value, a 12% semiannual coupon, 12 years to maturity, and an 8% YTM. What is the bond's price? Round your answer to the nearest cent.

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  1. 25 June, 18:51
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    The bond's price is $1,304.94

    Explanation:

    Price of the bond is the present value of all cash flows of the bond. Price of the bond is calculated by following formula:

    According to given data

    Coupon payment = C = $1,000 x 12% = $120 annually

    Coupon payment = C = $120 / 2 = $60 semiannually

    Number of periods = n = 2 x 12 years = 24 periods

    Current Yield = r = 8% / 2 = 4% semiannually

    Price of the Bond = $60 x [ (1 - (1 + 4%) ^-24) / 4% ] + [ $1,000 / (1 + 4%) ^24 ]

    Price of the Bond = $60 x [ (1 - (1 + 0.04) ^-24) / 0.04 ] + [ $1,000 / (1 + 0.04) ^24 ]

    Price of the Bond = $60 x [ (1 - (1.04) ^-24) / 0.04 ] + [ $1,000 / (1.04) ^24 ]

    Price of the Bond = $914.82 + $390.12 = $1,304.94
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